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EXERCISE 1: COST OF CAPITAL
A company wants to raise $50 million to finance the following capital expenditure projects, with their respective rates of return.
| Project A | 8% |
| Project B | 9% |
| Project C | 10% |
| Project D | 11% |
| Project E | 12% |
| Project F | 13% |
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The various sources and cost of funds are as follows:
| In millions of $ | Amounts | Cost (after tax) |
| Common shares | $20 | 14% |
| Retained earnings | 10 | 10% |
| Mortgage | 10 | 6% |
| Bonds | 10 | 7% |
Questions
1. What is the companys cost of capital?
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